Discussion Papers No. 392, October 2004
Statistics Norway, Research Department
Turid Åvitsland and Jørgen Aasness
Combining CGE and
microsimulation models: Effects
on equality of VAT reforms
Abstract:
The effects on the degree of equality of reforms in indirect taxation are analysed by using a
microsimulation model of the Norwegian economy subsequent to a CGE model. The two main
reforms studied are substitution of a uniform VAT rate on all goods and services and substitution of
the non-uniform Norwegian VAT reform of 2001 for the previous, differentiated system. A main
characteristic of the non-uniform reform is the halving of the VAT rate on food. All reforms are made
public revenue neutral by changes in the VAT rate. Producer prices, pre-tax nominal incomes, wealth
and transfers are all exogenous in the microsimulation model. In this paper we feed percentage
changes in corresponding variables from the CGE model into the microsimulation model in order to
enrich the microsimulation analyses. The non-uniform VAT reform leads to a clear increase in
equality while the change in equality concerning the uniform reform is close to 0. With the uniform
VAT reform, as opposed to the non-uniform, decompositions show that taking CGE effects into
account has a large impact on the degree of equality. Changed producer prices and changed pre-tax
nominal incomes, wealth and transfers both contribute to this.
Keywords: CGE and microsimulation models, "Macro-micro" links, Indirect taxation, VAT reforms,
Equality.
JEL classification: D3, D58, D61, D63, H2
Acknowledgement: The authors would like to thank Kirsten Hansen, Mohamed F. Hussein and
Bård Lian for assistance with applying the microsimulation model. We would also like to thank Brita
Bye for initiating the project and for reading and commenting on an earlier draft, Ådne Cappelen for
comments and the Norwegian Research Council for financial support (grant no. 143631/510).
Address: Jørgen Aasness, Statistics Norway, Research Department.
E-mail: jorgen.aasness@ssb.no
Turid Åvitsland, Statistics Norway, Research Department. E-mail: turid.avitsland@ssb.no
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1. Introduction
When evaluating tax reforms, effects on efficiency and equality are of prime interest. The standard
tool for applied, efficiency analyses of tax reforms in specific economies is computable general
equilibrium (CGE) models. Often these include only one representative consumer, making it
impossible to study effects on equality between different households. CGE models with more than one
consumer do exist but are likely to have only a small number of representative household groups. This
fact may imply that the equality part of the analysis will tend to be too crude. Microsimulation models
are therefore apt to be the preferred instrument when applied, equality analyses of tax reforms in
specific economies are undertaken. However, these models often assume unchanged producer prices,
pre-tax nominal incomes, wealth and transfers and may therefore miss valuable information because of
their partial nature.
Efficiency effects in the Norwegian economy of three indirect taxation reforms, made public revenue
neutral by changes in the VAT rate, have earlier been analysed by Bye, Strøm and Åvitsland (2004).
They employed a CGE model with one representative consumer, disregarding equality effects. In this
paper we analyse effects on equality of the same three indirect taxation reforms. For this purpose, a
microsimulation model of the Norwegian economy is used subsequent to the mentioned CGE model.
Producer prices, pre-tax nominal incomes, wealth and transfers are all exogenous in this
microsimulation model and percentage changes in such variables from the CGE anlyses are fed into
the microsimulation model. By combining CGE and microsimulation models in such a way, the
equality analyses are enriched by taking into account potentially important information from the
general equilibrium analyses.
Davies (2003) offers a critical survey concerning research on complementing microsimulation with
CGE or macroeconomic models. He distinguishes between cases where the different model types have
been merged and cases where the models have been treated in a sequential manner. Our procedure
belongs to the latter. Davies (2003) stresses the paper by Bourguignon, Robilliard and Robinson
(2003) as an example of the sequential approach. Bourguignon et al. (2003) employ a simple CGE
model and a microsimulation model where individual incomes are endogenous and consumer prices
are exogenous. The CGE model is calibrated so that aggregate individual incomes are equal to
corresponding values in the microsimulation model in the baseline scenario. CGE changes in incomes
are then fed into the microsimulation model by adjustment of previously estimated intercepts. The
3
CGE model's prices are also implemented in the microsimulation model. Their method relies on a set
of assumptions that yield a degree of separability between the macro, or CGE, part of the model and
the micro-econometric modeling of income generation at the household level. We employ a more
advanced CGE model. Our microsimulation model is more detailed than the one used in Bourguignon
et al. (2003) and both pre-tax incomes and consumer prices are exogenous in our microsimulation
model. Our procedure for combining the two models includes features that ensure a certain degree of
consistency, but there is not complete consistency. In particular, the change in total private
consumption expenditure is not identical in the CGE and microsimulation models. However,
sensitivity analysis indicates that this last inconsistency is unimportant for our results on equality
effects of policy reforms.1
Distributional effects of taxes may be analysed at a specific moment in time or over the life cycle.
Davies, St-Hilaire and Whalley (1984) find that variations in consumption's share of income is smaller
in life cycle than annual data. This reduces the regressivity of taxes assumed to be born by
consumption, like sales and excise taxes. In this paper we analyse distributional effects using a static
microsimulation model to compare different steady state solutions of a dynamic CGE model.
The three reforms analysed in this paper are evaluated against a baseline scenario which describes the
Norwegian, non-uniform, system of indirect taxation in 1995. The first reform analysed is the general
VAT reform, where all goods and services are subject to the same VAT rate. The second reform
analysed is abolition of the investment tax, where the investment tax is set equal to zero. This reform is
both analysed separately and as part of the general VAT reform. The third reform analysed is the
political VAT reform. This reform introduces another non-uniform VAT system, of which a main
characteristic is the halving of the VAT rate on food and non-alcoholic beverages. This VAT system
was actually implemented in Norway in 2001. All the three reforms are in the CGE analysis made
public revenue neutral by changes in the VAT rate.
Ballard, Scholz and Shoven (1987) analyse welfare effects of adopting different VAT systems for the
US. There is no VAT in their baseline scenario. They employ a CGE model with 12 consumer groups,
differentiated by income class. The analysed reforms include a uniform VAT and a differentiated VAT
system. The reforms are made revenue neutral by lowering the personal income tax, both in an
additive and a multiplicative way. They find that rate differentiation produces a less regressive
1
The mentioned CGE model has also been integrated with a detailed microeconometric model of labour supply, see Aaberge
et al. (2004).
4
distribution of welfare gains and losses than those of a uniform VAT. However, for three of their four
VAT simulations, the VAT is a regressive tax-policy change.
We find that the degree of equality, measured by 1 minus the Gini-coefficient, is clearly increased
with the political VAT reform. For the general VAT reform the change in equality is close to 0.
Decompositions show that for both the political and general VAT reform the change in consumer
prices contributes to increase the degree of equality. This fact is most distinct with the political VAT
reform and may be explained by the halving of the VAT rate on food and non-alcoholic beverages.
The change in after-tax disposable income implies a reduction in the degree of equality with the
general VAT reform but is of no importance concerning the political VAT reform.
Other decompositions show that including CGE effects has a large impact on the degree of equality
concerning the general VAT reform. More specifically, both changed producer prices and changed
pre-tax nominal incomes, wealth and transfers contribute to reduce the increase in equality. For the
political reform, including CGE effects is not important.
The paper is organised as follows; section 2 gives a short description of the CGE model and
microsimulation model employed in the analyses. Section 3 describes the policy experiments in more
detail. Section 4 deals with how the CGE and microsimulation models are combined and evaluates our
linking procedure. The numerical equality results are given in section 5, including some
decompositions. Section 6 concludes.
2. Basic features of the models
2.1 The CGE model
The model employed in Bye et al. (2004) is a numerical intertemporal general equilibrium model for
the Norwegian economy.2 The model gives a detailed description of taxes, production and
consumption structures in the Norwegian economy. The model has 41 private and 8 governmental
production activities and 24 commodity groups. The next sections briefly outline some of the
important features of the model. A more detailed description of the model is found in Bye (2000) and
Fæhn and Holmøy (2000).
2
The model has been developed by Statistics Norway. Previous versions of the model have been used routinely by the
Norwegian Ministry of Finance for long-term forecasting and policy analyses.
5
Producer behavior and technology
The structure of the production technology is represented by a nested tree-structure of CESaggregates. All factors are completely mobile and malleable3. The model of producer behavior is
described in detail by Holmøy and Hægeland (1997). The model incorporates both the small open
economy assumption of given world market prices, and avoids complete specialization through
decreasing returns to scale. Producer behavior is generally specified at the firm level. All producers
are considered as price takers in the world market, but have market power in the home market.
Empirical analyses of Norwegian producer behavior support the existence of some domestic market
power, see Klette (1994) and Bowitz and Cappelen (2001).
Consumer behavior
Total consumption, labor supply and savings result from the decisions of an infinitely lived
representative consumer, maximizing intertemporal utility with perfect foresight. The consumer
chooses a path of full consumption subject to an intertemporal budget constraint, which ensures that
the present value of material consumption in all future periods does not exceed total wealth (current
non-human wealth plus the present value of after tax labor income and net transfers). The distribution
of full consumption on material consumption and leisure is determined by a translated CES utility
function, cf. Bye (2003). Total material consumption is allocated across 24 different commodity
groups according to a complete demand system based on a five level nested utility tree. Each subutility
function is a translated CES where the "minimum" consumptions are linear functions of the number of
children and the number of adults in the household. Fixed costs are included and economies of scale in
household production are thus taken into account. The aggregate demand functions are derived by
exact aggregation across all households in the population, where the number of households, adults and
children in Norway are the only demographic variables that enter the aggregate demand. The same
aggregate demand function can also be derived from a representative, utility maximizing consumer,
where the demographic variables then can be interpreted as exogenous preference variables for the
representative agent. See Aasness, Bye and Mysen (1996) for a theoretical outline, Aasness and
Holtsmark (1993) for specification and calibration of an earlier version of the model, and Wold (1998)
for a detailed description of the current model.
Government and intertemporal equilibrium
The government collects taxes, distributes transfers, and purchases goods and services from the
industries and abroad. Overall government expenditure is exogenous and increases at a constant rate
3
Except in the production of electricity, see Holmøy, Nordén and Strøm (1994).
6
equal to the steady state growth rate of the model. The model incorporates a detailed account of the
government’s revenues and expenditures. In the policy experiments it is required that the nominal
deficit and real government spending follow the same path as in the baseline scenario, implying
revenue neutrality in each period.
2.2 The microsimulation model
We have used the model LOTTE-Konsum, developed at Statistics Norway, cf. Aasness (1995) for the
basic outline of the microsimulation model and Aasness, Benedictow and Hussein (2002) for a recent
application. LOTTE-Konsum calculates savings, total consumption expenditure, consumption
expenditure for 24 commodity groups, the number of consumption units and price indexes for each
household, taking into consideration that different households have different consumption patterns.
LOTTE-Konsum also calculates different measures of distributional effects for the model population,
which represents the entire Norwegian population. We have developed a specific version of the model
for our particular application, in order to achieve approximate consistency with the CGE analysis.
LOTTE-Konsum is based on consumer theory and econometric analysis of consumer behaviour and
standard of living, and welfare theory for aggregation of standard of living over households and
individuals in a population. A model for direct taxes, LOTTE, is used as a pre-model for LOTTEKonsum. Personal pre-tax incomes, wealth and transfers are exogenous in this model, while personal
tax payments are endogenous. The resulting disposable after-tax income from LOTTE is used as
exogenous input into LOTTE-Konsum, cf. Aasness et al. (1995). LOTTE uses a model population of
approximately 15 000 households with about 40 000 individuals, weighted to be representative for the
Norwegian population. Consumer prices are exogenous in the microsimulation model.
As a measure of the standard of living for each individual in a household, we use total consumption
per consumption unit in the household.4 This implies that all persons belonging to the same household
4
The standard of living for household k, and all its members, in situation t is wkt = ckt/ek = ykt/(Pktek), where total
consumption of the household (ckt) is defined as ckt = ykt/Pkt, i.e. total consumption expenditure (ykt) divided by a household
specific price index (Pkt), and ek is the number of equivalent adults in the household in base year prices. Aasness (1995)
shows that this can be interpreted as a money metric utility.
The household demand system is used to derive a system of Engel functions in base year prices and predicting non-negative
budget shares for 24 commodities, adding to one, for each of the 15 000 households in the model. These budget shares are
used in Laspeyres price indexes (Pkt) for each household k and local tax reform t. Such price indexes are approximately equal
to any utility based price index for local reforms. It is the distribution of these price indexes, and the underlying distribution
of budget shares, that determine the distributional effects of indirect taxes in our model. The household demand system used
to generate the budget shares is the same as the one used in the CGE model, except for a modification in order to take into
account corner solutions for some of the households. The microsimulation model is calibrated so that the macro budget
shares for the 24 commodities are the same in the micro model and the CGE model in the base year.
7
has the same standard of living, a relevant assumption in the absence of information about the internal
distributions within the households.5 The households are considered as producers of standard of living
for its members. We allow for the existence of economies of scale in the households, which means that
the number of consumption units in a household is smaller than the number of persons in the
household. For instance, a household consisting of two adults will need less than twice the income of a
single adult to achieve the same standard of living. Furthermore, we assume that children need less
consumption than adults to achieve the same standard of living. This is reflected in the model by a
larger increase in the number of consumption units when a household is extended with an adult than
with a child. This implies that large households, and families with children in particular, are relatively
efficient as producers of standard of living.
An equivalence scale is used to calculate the number of consumption units in the households.6 There
exists no generally accepted foundation for empirical determination of equivalence scales. Therefore,
the choice of equivalence scale is a controversial subject, see e.g. Buhman, Rainwater, Schmaus and
Smeeding (1988), Atkinson (1992) and Nelson (1993). In this paper we employ the so-called OECDscale, which implies that if the cost of living for a one-person household is normalised to 1, the cost of
keeping the standard of living constant when the household is expanded with an adult is 0.7, and with
a child 0.5. Several empirical studies of Norwegian consumer expenditure surveys find support for the
hypothesis that the OECD-scale provides a suitable approximation, see Bojer (1977), Herigstad (1979)
and Røed Larsen and Aasness (1996). We also perform sensitivity analyses of policy results with
respect to the choice of equivalence scale within a wide class of scales, cf. footnote 6 and 16 for
details and Aasness (1997) for discussions of sensitivity analysis within this type of continuous class
of scales.
3. Baseline scenario and policy alternatives
The VAT is a tax formally paid by the purchaser of a good or service. All the different stages in the
production process are participating in the calculation and collection of the VAT. A company may
either be a) subject to the VAT, meaning there is a VAT on its sales7 but VAT paid on the company's
5
This can be rationalized by a household maximin welfare function of the individual utilities, cf. Blackorby and Donaldson
(1993). Like them we use household demand functions and aggregate individual well-being across the population.
6
The number of consumption units in household k, in base year prices, is defined as ek = (1-f(e)) + ez1k + f(e)z2k, where z1k
and z2k are the number of children and adults respectively, e is the cost of living for a child relative to a single adult, and f(e)
is the cost of living for an additional adult relative to a single adult. The parameter e is assumed to lie in the interval [0,1], see
Aasness (1997) or Aasness, Benedictow and Hussein (2002) for details.
7
A special case is a VAT rate set equal to 0 (zero-rating).
8
purchases of material inputs and investment goods are refunded or b) not subject to the VAT, meaning
there is no VAT on its sales but the VAT paid on the company's purchases of material inputs and
investment goods is not refunded. The destination principle also applies, meaning that exports subject
to the VAT have a rate set equal to zero, while imports subject to the VAT have the Norwegian rate
attached to it.
The system of indirect taxation in 1995 (the benchmark year in both the CGE and microsimulation
models) was characterized by a general liability to pay VAT on goods. There were few exemptions.
There was no general liability to pay VAT on services but some were explicitly mentioned in the law
and were to have a positive VAT rate. Many services were not subject to the VAT, however.
Generally, the VAT rate was equal to 23 per cent. Paying of the investment tax was connected with
paying of the VAT: If the company was subject to a VAT on its sales, and thereby did not pay any
VAT on its material inputs or investment goods, an investment tax had to be paid. However, in
addition several exemptions were specified in the investment tax Act.
The described system of indirect taxation in 1995, in addition to other taxes in the Norwegian
economy, is implemented in the baseline scenario both in the CGE and microsimulation model.
The first policy alternative, called the general VAT reform, consists of a general VAT rate equal to 23
per cent on all goods and services8. In addition, there is VAT on the purchase of new investments in
dwellings and cars, but there is no VAT on services from these consumer durables. The investment tax
is simultaneously set equal to zero. The second policy alternative, called abolition of the investment
tax9, only sets the investment tax equal to zero.
The third policy alternative, called the political VAT reform, analyses the following characteristics of
the actual, Norwegian VAT reform of 2001: Some more services are subject to the VAT, the general
VAT rate is increased from 23 to 24 per cent and the VAT rate on food and non-alcoholic beverages is
set equal to 12 per cent. In principle, the somewhat extended scope of the VAT should have led more
companies to pay the investment tax. Since the investment tax was to be abolished later on,
exemptions were introduced for the affected companies. The investment tax in the political VAT
reform is therefore equal to the investment tax in the baseline scenario.
8
The only exceptions from this are the banks' interest rate differential and non-profit institutions serving households where
the VAT rate equals zero.
9
All policy alternatives are made public revenue neutral in the CGE simulations by changes in the VAT
rate. The increase in the general VAT rate necessary to ensure public revenue neutrality is 1.05, 2.09
and 1.54 percentage points with the general VAT reform, abolition of the investment tax and the
political VAT reform, respectively. For more details about the system of indirect taxation in the
baseline scenario and the three policy alternatives, see Bye et al. (2004).
4. Combining the CGE and microsimulation model
In this paper we combine the CGE and microsimulation models by multiplying consumer prices,
nominal pre-tax incomes, wealth and transfers in the microsimulation model by percentage changes in
corresponding variables in the CGE model. The microsimulation model calculates personal taxes,
after-tax household disposable income, total household consumption expenditure, household specific
price indexes and standard of living of each person.
The two models have the following features in common: Both describe the Norwegian economy, the
demand system for material consumption is almost identical in the two models, with the same 24
commodity groups, both are characterized by the VAT rates present in 1995 and both are calibrated to
the benchmark year 1995. The latter fact, in addition to the fact that Bye et al. (2004) simulate the
baseline scenario by keeping all exogenous variables constant at their benchmark values10, imply that
both models are characterized by 1995-prices. Two important differences between the CGE and
microsimulation models are that the former has an endogenous leisure variable and is intertemporal,
while the latter does not include any leisure variable and describes the situation in a particular year.
As already mentioned, we multiply microsimulation variables by percentage changes in corresponding
CGE variables. These changes refer to changes from baseline scenario to policy alternative j in the
CGE model's steady state.
(1) MSV
j ,t
=
CGEV
j ,t *
CGEV base,t
*
*
MSV
base ,t
MSV j ,t
CGEV j ,t
⇔
=
.
*
MSV base,t CGEV base,t
9
The investment tax was actually abolished in Norway in 2002.
An exception is parts of the tax system, which are substituted by the tax code of 2000. There are not any major differences
between the tax code in 1995 and the tax code implemented in the CGE model, though.
10
10
MSV
j ,t
and MSV base,t are the microsimulation variable in year t in policy alternative j and the
baseline scenario, respectively. CGEV
j ,t *
*
and CGEV base,t are the CGE variable in year t* in policy
alternative j and the baseline scenario, respectively. In our case, t is equal to the base year (1995) in
the microsimulation (and CGE) model. t* is equal to the CGE analysis' steady state. Since Bye et al.
(2004) simulate the baseline scenario by keeping all exogenous variables constant at their benchmark
values the CGE model's steady state may be interpreted as representing the Norwegian economy in
1995 after it has "calmed down". The assumption we make is therefore that the ratio between a
microsimulation variable in policy alternative j and baseline scenario in 1995 is equal to the
corresponding ratio in the CGE model's "1995", that is the 1995-economy after it has "calmed down".
4.1 Consumer prices
There is perfect correspondence between the classification of goods and services in the CGE and
microsimulation models. Linking consumer prices in the two models is therefore unproblematic. The
numerical changes in consumer prices from the CGE analyses that are used as input in the
microsimulation model, are presented in appendix A.
4.2 Income and wealth
As opposed to the CGE model, the microsimulation model contains a very detailed description of the
tax system for personal taxpayers. This implies that the model also contains incomes and wealth at a
very detailed level. In addition, the two models are based on data from different sources and there are
differences in the definition of incomes in these two datasets, see Epland and Frøiland (2002).
Accordingly, there is no simple one-to-one correspondence between incomes and wealth in the
microsimulation and CGE models.
We have chosen to use national incomes and wealth from the CGE model. We therefore implicitly
assume that households receive constant shares of the different income and wealth components in both
baseline and policy alternatives such that we can employ percentage changes in the mentioned
variables as exogenous input into the microsimulation model11. Broadly speaking, we have linked
incomes in the microsimulation and CGE models as shown in table 1. The numerical changes from the
CGE analyses are shown in appendix A.
11
In our CGE simulations, public sector's net savings and net wealth are unchanged from baseline scenario to policy
alternative. This implies that changes in net national savings and net wealth are equal to the private sector's change in these
variables.
11
Table 1. Linking incomes in the microsimulation and CGE models
Microsimulation model
Wage income
Self-employed taxable income
Dividends
Interest income from foreign debtors and interest on
loans to foreign creditors
CGE model
Total wage and salary payments net of social taxes for
employees
Self-employed's risk-adjusted1), net2), pre-tax3) return
on real capital + calculated wage income for selfemployed
Limited liability companies' risk-adjusted1), net2), pretax3) return on real capital
Interest rate multiplied by net national debt
1) See Bye and Åvitsland (2003) and Bye et al. (2004) for an explanation of risk-adjustment in the CGE model.
2) That is after depreciation.
3) But after paying of VAT and/or investment tax on material inputs and investment goods.
We have linked wealth in the microsimulation and CGE models as shown in table 2. The numerical
changes from the CGE model are reported in appendix A.
Table 2. Linking wealth in the microsimulation and CGE models
Microsimulation model
Bank deposits abroad and debt abroad
Shares
Value of dwellings for taxation purposes, private cars,
self-employed's cars and machinery, self-employed's
fishing boats
CGE model
Net national debt
Value of the real capital stock in limited liability companies
Value of dwellings, private cars, self-employed's cars
and machinery, self-employed's fishing boats
In addition, expenses and some components of income and wealth in the microsimulation model are
absent in the CGE model. We have chosen to keep these variables constant, including interest income
from Norwegian debtors, interest on loans to Norwegian creditors12, domestic bank deposits and
domestic debt.
A detailed description of assumptions and the linking of income and wealth in the two models are
given in appendix B.1 and B.2.
4.3 Transfers
In the CGE model, the different transfers, that is pensions, sickness benefits, unemployment benefits,
child benefits, other transfers from Central Government and other transfers from Local Government,
12
The pre-tax income concept used in the microsimulation model includes interest income but excludes interest on debt.
Stipulated capital income stemming from housing is also excluded. Dwelling services are part of private consumption
expenditure.
12
automatically change as a result of changes in the wage rate, total wage payments or the price index of
aggregate private consumption. The detailed linking of transfers in the two models is reported in
appendix B.3. The numerical changes in transfers from the CGE analyses are reported in appendix A.
4.4 Leisure and savings
Leisure
Leisure is part of the utility function in the CGE model, but not in the microsimulation model. Higher
(lower) incomes due to increased (lower) labour supply are fed into the microsimulation model but the
corresponding decrease (increase) in leisure is not taken into account. Therefore, only the positive
(negative) aspects of increased (decreased) labour supply are included in the microsimulation model.
Savings
There is a somewhat analogous problem concerning savings: In steady state, net savings in real capital
are zero, but real capital wealth may have increased (decreased) from baseline scenario to a policy
alternative due to positive (negative) savings in real capital earlier in the path. We employ changes in
income and wealth from the CGE model's steady state when linking the microsimulation and CGE
model. This means that only the gains (losses) from increased (decreased) savings in real capital are
taken into account when we link the two models. A similar argument applies to financial savings.
4.5 Evaluation of the linking procedure
In order to evaluate our sequential linking procedure, we compare aggregate private consumption
expenditure in current prices in the two models. Both the level in the baseline scenario and the change
and percentage change from baseline scenario to the three policy alternatives are compared, see table
3.
Table 3. Aggregate private consumption expenditure. Current purchaser prices. Microsimulation results versus CGE results. Billion NOK and percentage change
General VAT reform
Microsim.
VCB in baseline scenario 452.75
Change in VCB from
13.14
baseline scenario
Percentage change in VCB 2.90
from baseline scenario
Political VAT reform
CGE
428.22
15.25
Abolition of investment
tax
Microsim.
CGE
452.75
428.22
3.54
3.84
Microsim.
452.75
0.03
CGE
428.22
0.07
3.56
0.78
0.01
0.02
0.90
VCB: Aggregate private consumption expenditure measured in purchaser prices.
13
Numbers from the baseline scenario apply to the year 1995 in the microsimulation model, while these
numbers apply to the steady state in the CGE model. The steady state numbers may, as mentioned
earlier, be interpreted as representing the economy in 1995 after it has "calmed down".
Concerning evaluation of our linking procedure, the impression is that it gives quite reasonable results.
There is not complete consistency, visualized by the fact that the change in aggregate private
consumption expenditure is not identical in the two models. The differences between the results from
the CGE and microsimulation models are not significant, however, cf. footnote 17.
5. Results
The distribution of the standard of living over a population can be summarised in several ways. In this
paper, we focus on the simple aggregated measure equality (E), defined as (1 - G), where G is the
Gini-coefficient13. The equality measure varies between 0 and 1, and the value increases when the
distribution of the standard of living becomes more equal.
It is difficult to grasp whether a change in the degree of equality is large or not. We therefore
"translate" a change in the degree of equality into a change in the standard of living per person, while
simultaneously keeping Sen welfare constant. Sen welfare is defined as: S = WE, where S is Sen
welfare, W is average standard of living per person and E is the degree of equality, cf. Sen (1974) for
an axiomatic basis. The average standard of living per person, W, is in this paper measured by the real
consumption expenditure per equivalent adult, taken from the microsimulation model in 1995 and E is
defined as above. When Sen welfare is to be unchanged from baseline scenario to the three policy
alternatives, a reforms' increase (decrease) in equality must be compensated by a decrease (increase) in
the standard of living per person. Appendix C may be consulted for details.
Table 4 shows the absolute change in the degree of equality from baseline scenario to the three policy
alternatives for our main simulations, 1), and for different decompositions, 2) - 8). It also shows the
change in the degree of equality "translated" into a change in the standard of living per person for
given Sen welfare.
13
The Gini-coefficient is the most common measure of inequality in the economic literature, see Aaberge (2001) for an
axiomatic foundation of the Gini-coefficient.
14
Table 4. Absolute change in the degree of equality from baseline scenario. Translation of this
into an absolute change in NOK (Euro14) in the standard of living per person (W15)
for given Sen welfare
General VAT reform
Reform in microsimulation model
1) a+b+c+d+e
2) a
Equality
0.00012
0.00118
Abolition of investPolitical VAT reform
ment tax
Translated Equality Translated Equality Translated
into W,
into W,
into W,
NOK
NOK
NOK
(Euro)
(Euro)
(Euro)
-69
(-8)
-0.00040
-677
-0.00038
(-80)
3) a+c+d+e
0.00057
-326
0.00073
-418
-0.00064
-0.00061
347
-0.00014
-0.00231
1306
-0.00026
-0.00089
506
-0.00064
0.00248
-1432
0.00162
80
148
364
-0.00026
148
0.00170
0.00063
-361
-978
(-116)
0.00005
-29
(-3)
0.00001
-6
(-1)
-0.00002
(18)
(-170)
-932
(-111)
(43)
(60)
8) e
364
-903
(-107)
(18)
(155)
7) d
0.00157
(9)
(41)
6) c
217
-1013
(-120)
(43)
(-50)
5) c+d+e
0.00176
(26)
(-39)
4) a+b
228
(27)
11
(1)
0.00005
(-43)
-29
(-3)
a: changed VAT rates on consumer goods and services
b: changed producer prices from the CGE simulations
c: changed pre-tax incomes, excl. of dividends, and changed pre-tax wealth from the CGE simulations
d: changed pre-tax dividends from the CGE simulations
e: changed pre-tax transfers from the CGE simulations
Our main simulations, that is the case where all CGE effects are taken into account, (cf. 1) in table 4)
show that equality is clearly increased with the political VAT reform. With the general VAT reform
and abolition of the investment tax the changes in equality are close to 016,17.
14
The exchange rate used in the calculations is equal to 8.42 NOK per Euro.
W is equal to 130491 NOK (15498 Euro) in 1995.
16
All of these conclusions hold when we perform sensitivity analyses with respect to the choice of equivalence scale (cf.
footnote 6).
17
Since our linking procedure does not ensure complete consistency, visualized by the fact that the change in aggregate
private consumption expenditure is not identical in the two models, we have undertaken the following exercise: The main
simulation of the general VAT reform (cf. 1) in table 4) is undertaken while simultaneously changing proportionally all
incomes, wealth and transfers so that the resulting percentage change in aggregate private consumption expenditure in the
microsimulation model is identical with the percentage change in the CGE model. The result shows that the change in
equality is still close to 0 (-0.00005).
15
15
Decompositions show that for both the general and political VAT reform the change in consumer
prices (cf. 4) in table 4) contributes to increase the degree of equality. This effect is largest for the
political VAT reform, but is also distinct for the general VAT reform. The political VAT reform is
characterized by a reduction in the VAT rate on food from 23 to 12 per cent. Generally, persons with a
low standard of living have a larger budget share of food than persons with a high standard of living.
This implies that the reduced VAT rate on food contributes to increase the degree of equality. Both the
political and the general VAT reform introduce VAT on more services (the former only introduces
VAT on some more services, while the latter introduces VAT on all services not subject to the VAT in
the baseline scenario). Generally, persons with a low standard of living have a smaller budget share of
services than persons with a high standard of living. These facts contribute to increase the degree of
equality in the political and general VAT reform.
The partial effect on the degree of equality of changed after-tax disposable income (cf. 5) in table 4) is
clearly negative with the general VAT reform and of no importance with the political VAT reform.
Concerning the general VAT reform, increased transfers imply a large increase in the degree of
equality (cf. 8) in table 4). Generally, transfers constitute a larger share of income for persons with a
low standard of living than for persons with a high standard of living. This together with the fact that
the increase in transfers is large due to a large increase in wages (in the CGE model many transfers
depend upon wages), explain why the degree of equality is much increased. On the other hand, other
components of after-tax disposable income have the opposite effect on the degree of equality: The
increase in dividends has a clear negative effect on the degree of equality (cf. 7) in table 4) since
dividends generally constitute a smaller share of income for persons with a low standard of living than
for persons with a high standard of living. The increase in incomes, exclusive of dividends, and the
change in wealth lead to a distinct reduction in the degree of equality (cf. 6) in table 4). This may be
explained by the fact that wage income generally constitutes a smaller share of income for persons
with a low standard of living than for persons with a high standard of living. The all in all negative
effect on equality of changed after-tax disposable income is approximately cancelled out by the
positive effect on equality of changed consumer prices concerning the general VAT reform.
With abolition of the investment tax, both changed consumer prices and changed after-tax disposable
income lead to changes in equality which are close to 0.
Concerning the general VAT reform, there is a clear effect on the degree of equality from including
CGE effects as compared with the case where such effects are absent (cf. 1) and 2), respectively, in
16
table 4). More specifically, the degree of equality is close to zero when CGE effects are taken into
account while the degree of equality is increased by 0.001 when CGE effects are not included. As
compared with the case where CGE effects are absent (cf. 2) in table 4), including changes in producer
prices (cf. 4) in table 4) and changes in pre-tax incomes, wealth and transfers (cf. 3) in table 4) both
contribute to reduce the increase in the degree of equality.
With the political VAT reform, and especially with abolition of the investment tax, the effect on the
degree of equality of including CGE effects, as compared with the case where such effects are absent,
is of no importance. Concerning abolition of the investment tax, the partial effect of including changes
in producer prices (cf. 4) in table 4) implies a smaller reduction in equality as compared with the case
where CGE effects are absent (cf. 2) in table 4). On the other hand, only changing pre-tax incomes,
wealth and transfers (cf. 3) in table 4) leads to a larger reduction in equality as compared with the case
where CGE effects are absent (cf. 2) in table 4). Taken together, the first effect on equality is cancelled
out by the second such that the degree of equality is the same in the two cases where CGE effects are
included and excluded.
6. Concluding remarks
In this paper we have used a microsimulation model of the Norwegian economy subsequent to a CGE
model to analyse effects on the degree of equality of three indirect taxation reforms. Efficiency effects
of these three reforms have earlier been analysed by Bye et al. (2004) by employing a CGE model
with one representative consumer.
The three reforms analysed in this paper are evaluated against a baseline scenario which describes the
Norwegian, non-uniform, system of indirect taxation in 1995. The first reform analysed is the general
VAT reform, where all goods and services are subject to the same VAT rate. The second reform
analysed is abolition of the investment tax, where the investment tax is set equal to zero. This reform is
both analysed separately and as part of the general VAT reform. The third reform analysed is the
political VAT reform. This reform introduces another non-uniform VAT system, of which a main
characteristic is the halving of the VAT rate on food and non-alcoholic beverages. This VAT system
was actually implemented in Norway in 2001. All the three reforms are in the CGE analysis made
public revenue neutral by changes in the VAT rate18.
18
Bye et al. (2004) find that welfare is increased with the general VAT reform, while it is reduced with the other two
reforms; the political VAT reform experiencing the largest reduction.
17
Consumer prices, pre-tax nominal incomes, wealth and transfers are all exogenous in the
microsimulation model and percentage changes in such variables from the CGE anlyses are fed into
the microsimulation model. By combining CGE and microsimulation models in such a way, the
equality analyses are enriched by taking into account potentially important information from the
efficiency analyses.
We find that equality is clearly increased with the political VAT reform. Concerning the general VAT
reform and abolition of the investment tax the changes in equality are close to 0. Decompositions
show that for both the political and general VAT reforms the change in consumer prices contributes to
increase the degree of equality. This fact is most distinct with the political VAT reform. The change in
after-tax disposable income implies a reduction in the degree of equality with the general VAT reform
but is of no importance concerning the political VAT reform. With abolition of the investment tax,
both the change in consumer prices and the change in after-tax disposable income contribute to a
change in the degree of equality which is close to zero.
Other decompositions show that including CGE effects, as compared with the case where CGE effects
are not taken into account, has a large impact on the degree of equality concerning the general VAT
reform. Both changed producer prices and changed pre-tax nominal incomes, wealth and transfers
contribute to reduce the increase in equality. With the other two reforms, including CGE effects is not
important.
18
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22
Appendix A
Simulated changes in consumer prices, income, wealth and
transfers
Table A.1. Consumer prices when producer prices are endogenous. Percentage changes from
baseline scenario. Long run effects
General VAT
reform
1.289
Abolition of
investment tax
1.373
Political VAT
reform
-7.015
Beverages and tobacco
0.790
1.434
-0.789
Electricity
2.441
0.055
1.777
Fuels
2.253
1.302
1.922
Petrol and Car Maintenance
2.602
1.304
2.764
Clothing and Footwear
0.576
1.296
2.113
Goods for Recreation Activities
0.725
1.377
2.070
Furniture and Durable Consumer Goods
1.722
1.261
1.923
Electrical Household Equipment
0.757
1.395
2.076
20.322
0.172
-0.134
Medicines and Medical Goods
0.640
1.229
1.879
Gross Rents
0.343
0.546
1.547
User Cost of Cars etc.
0.634
1.321
1.954
Road Transport etc., Local
18.905
-0.107
0.615
Road Transport etc., Long-distance
18.329
-0.062
0.669
Air Transport etc.
16.315
0.644
-0.186
Railway and Tramway Transport, Local
15.315
0.486
0.897
Railway Transport, Long-distance
15.488
0.481
0.871
Water Transport, Local
23.780
0.089
0.231
Water Transport, Long-distance
23.916
0.045
0.115
Postal and Telecommunication Services
1.496
0.470
2.029
Other Goods
6.300
0.917
1.612
Other Services
9.796
0.990
1.641
0.00
0.00
0.000
Food
Health Services
Direct Purchases Abroad by Resident Households
23
Table A.2. Consumer prices when producer prices are constant. Percentage changes from baseline scenario. Long run effects
General VAT
reform
1.363
Abolition of investment tax
1.652
Political VAT
reform
-7.082
Beverages and tobacco
0.847
1.676
-0.816
Electricity
3.611
1.494
1.823
Fuels
2.464
1.623
1.979
Petrol and Car Maintenance
3.952
1.498
2.665
Clothing and Footwear
0.872
1.724
2.104
Goods for Recreation Activities
0.898
1.698
2.072
Furniture and Durable Consumer Goods
2.081
1.603
1.956
Electrical Household Equipment
0.904
1.704
2.078
24.050
0.000
0.000
Medicines and Medical Goods
0.937
1.692
1.871
Gross Rents
0.752
0.104
0.127
User Cost of Cars etc.
0.807
1.596
1.947
Road Transport etc., Local
24.050
0.000
0.000
Road Transport etc., Long-distance
23.444
0.044
0.054
Air Transport etc.
24.050
0.000
0.000
Railway and Tramway Transport, Local
24.050
0.000
0.000
Railway Transport, Long-distance
23.675
0.027
0.033
Water Transport, Local
24.050
0.000
0.000
Water Transport, Long-distance
24.050
0.000
0.000
Postal and Telecommunication Services
2.271
1.592
3.217
Other Goods
6.458
1.268
1.636
13.369
0.781
1.521
0.000
0.000
0.000
Food
Health Services
Other Services
Direct Purchases Abroad by Resident Households
24
Table A.3. Nominal incomes. Percentage changes from baseline scenario. Long run effects
General VAT Abolition of Political VAT
reform
reform investment tax
Total wage and salary payments net of social taxes for
employees
3.674
1.014
0.000
A: Wage and salary payments net of social taxes for selfemployed1) in agriculture
3.796
0.921
0.054
B: Wage and salary payments net of social taxes for selfemployed1) in forestry
3.754
0.925
0.048
C: Wage and salary payments net of social taxes for selfemployed1) in fishing
3.203
0.750
0.039
D: Wage and salary payments net of social taxes for selfemployed1) in the rest of the industries2)
3.979
1.110
-0.146
2.719
0.580
0.038
1.555
0.214
0.019
Return on real capital for self-employed in fishing; pre-tax ,
risk-adjusted4), net of depreciation + C
2.968
0.694
0.034
Return on real capital for self-employed in the rest of the
industries2); pre-tax3), risk-adjusted4), net of depreciation+D
4.352
1.221
-0.095
Return on real capital in limited liability companies; pre-tax3),
risk-adjusted4), net of depreciation
5.281
1.543
0.112
43.111
11.158
-4.008
Return on real capital for self-employed in agriculture; pretax3), risk-adjusted4), net of depreciation + A
3)
Return on real capital for self-employed in forestry; pre-tax ,
risk-adjusted4), net of depreciation + B
3)
Interest rate multiplied by net national debt
1) We assume that the wage rate received by self-employed is equal to the wage rate received by employees.
2) That is all private production sectors, with the exception of agriculture, forestry, fishing, dwelling services, production of electricity, oil
and gas exploration and drilling, production and pipeline transport of oil and gas, ocean transport and imputed service charges from financial
institutions.
3) But after paying of VAT and/or investment tax.
4) See Bye and Åvitsland (2003) and Bye et al. (2004) for an explanation of risk-adjustment in the CGE model.
25
Table A.4. Nominal wealth. Percentage changes from baseline scenario. Long run effects
General VAT Abolition of Political VAT
reform
reform investment tax
43.111
11.158
-4.008
Net national debt
Value1) of real capital stock2) in limited liability companies
5.112
1.571
0.115
3)
1.719
0.672
0.717
3)
5.386
0.772
0.280
-4.094
-2.346
-0.105
1.379
0.595
0.009
Market value of dwelling capital
Market value of cars
Market value3) of cars and machinery2) for self-employed
3)
Market value of fishing boats for self-employed
1) Measured in purchaser price indexes, exclusive of VAT and/or the investment tax.
2) Comprising all private production sectors, with the exception of dwelling services, production of electricity, oil and gas exploration and
drilling, production and pipeline transport of oil and gas, ocean transport and imputed service charges from financial institutions.
3) Measured in purchaser price indexes, inclusive of VAT and/or the investment tax.
Table A.5. Transfers. Percentage changes from baseline scenario. Long run effects
General VAT Abolition of Political VAT
reform
reform investment tax
3.821
0.943
0.067
Pension
Sickness benefits etc.
3.674
1.014
0.000
Unemployment benefits
3.674
1.014
0.000
Child benefits
3.821
0.943
0.067
Other transfers, Central Government
3.821
0.943
0.067
Other transfers, Local Government
3.142
0.915
0.266
26
Appendix B
The symbol and name of the microsimulation variables (MSV) are first mentioned. Next, the symbol
and name of the corresponding CGE variables (CGEV) are written down. This means that all
microsimulation variables under the heading 1) MSV are exogenously changed by the percentage
change in the variable under the heading 1) CGEV, and so forth. Assumptions made are then clarified,
together with other comments. B.1 deals with income variables, B.2 with wealth variables and B.3
with transfer variables.
B.1 Combining income variables in the CGE and microsimulation
models
1) MSV
K2101, wage income and unemployment benefits for employees
K21013, of this: wage income only into the basis for calculation of member's premium to the National
Insurance Scheme
K2102, income entitled to the seaman's deduction
K2103, income stemming from child care in one's own home
K2104, profit from payments in kind
K2105, other income stemming from labour
K2401, children's wage income (children under 13 years of age)
K1607, calculated personal income limited liability company, liberal occupation
K1608, calculated personal income limited liability company, other industry
K3212, contribution to private/public Norwegian pension scheme in connection with the employment
XEKSTRA, adjustment of personal income
XELF, own wages in an enterprise
XGLF, basis for deduction of wages
XKAG, basis for return to capital
XKN, corrected self-employed, taxable income
XLAKT, wage costs concerning active owners
27
1) CGEV
yww , total wage and salary payments net of social taxes
2) MSV
K1601, calculated personal income one-man enterprise, primary industry
K1604, calculated personal income partner-assessed company, primary industry
K1612, part of wage income/pension stemming from enterprise from which the person in question
receives calculated personal income, primary industry
K1701, remuneration for work to partner in partner-assessed company where personal income is not
calculated, primary industry
2) CGEV
ww11ls11 + ww12 ls12 + ww13 ls13
wwj is wage per hour to wage earners in production sector j in current prices and net of social taxes, lsj
is number of hours worked by self-employed in production sector j, j = 11 (agriculture), 12 (forestry)
and 13 (fishing).
3) MSV
K1602, calculated personal income one-man enterprise, liberal occupation
K1605, calculated personal income partner-assessed company, liberal occupation
K1613, part of wage income/pension stemming from enterprise from which the person in question
receives calculated personal income, liberal occupation
3) CGEV
ww85 ls85
85 is the industry other private services.
4) MSV
K1603, calculated personal income one-man enterprise, other industry
K1606, calculated personal income partner-assessed company, other industry
K1614, part of wage income/pension stemming from enterprise from which the person in question
receives calculated personal income, other industry
K1702, remuneration for work to partner in partner-assessed company where personal income is not
calculated, other industry
28
4) CGEV
∑
ww j ls j
j∈PP \{PW ,11,12,13,85}
PP is all private production sectors and PW is the private production sectors 71 (Production of
electricity), 68 (Oil and gas exploration and drilling), 64 (Production and pipeline transport of oil and
gas), 60 (Ocean transport), 83 (Dwelling services) and 89 (Imputed service charges from financial
institutions).
5) MSV
K2701, self-employed, taxable income, agriculture
5) CGEV
sse11
∑ (bp
i ,11
− δˆi ,11 − risk ) pjbi k i ,11 + ww11ls11
i =10 , 40 ,50
sse11 is the share of self-employed in agriculture, i = 10, 40 and 50 are respectively buildings, cars and
machinery, bpi,11 is the user cost of capital type i per NOK invested in agriculture, δˆi ,11 is the
depreciation rate of capital type i in agriculture, risk is the risk premium, pjbi is the purchaser price
index, exclusive of VAT and the investment tax, for new investment, capital type i and ki,11 is the
capital stock of type i in agriculture in constant prices.
6) MSV
K2702, self-employed, taxable income, forestry
6) CGEV
sse12
∑ (bp
i ,12
− δˆi ,12 − risk ) pjbi k i ,12 +ww12 ls12
i =10 , 40, 50
7) MSV
K2703, self-employed, taxable income, fishing
7) CGEV
sse13
∑ (bp
i ,13
− δˆi ,13 − risk ) pjbi k i ,13 +ww13 ls13
i =30, 50
30 is the capital type ships and fishing boats.
29
8) MSV
K2704, other self-employed, taxable income (inclusive of liberal occupation)
K27041, self-employed, taxable income, partnership company
8) CGEV
∑
{
j∈PP \ PW ,11,12,13}
sse j
∑ (bp
i, j
i =10, 40 ,50 , 30,80
− δˆi , j − risk ) pjbi k i , j +
∑
ww j ls j
j∈PP \{PW ,11,12,13}
80 is the capital type aircraft.
There is a clear coherence between income types 2) to 8) since self-employed, taxable income both
consists of capital income and the self-employed's labour income and calculated personal income is
meant to reflect the self-employed's labour income. The above expressions for the self-employed's
labour income part of self-employed, taxable income and for the calculated personal income are
therefore identical. We assume that the self-employed's wage rate is equal to the wage rate received by
employees.
All private production sectors with the exception of 71 (Production of electricity), 68 (Oil and gas
exploration and drilling), 64 (Production and pipeline transport of oil and gas), 60 (Ocean transport),
83 (Dwelling services) and 89 (Imputed service charges from financial institutions) are included in the
above calculations. 68 (Oil and gas exploration and drilling), 64 (Production and pipeline transport of
oil and gas) and 60 (Ocean transport) are excluded because of a constant real capital stock and no user
costs of real capital attached to them. 89 (Imputed service charges from financial institutions) are not
included since there is no real capital stock there. 83 (Dwelling Services) are excluded since this is an
artificially constructed private production sector directly attached to private consumption. We have
chosen to omit 71 (Production of electricity) since the user cost of capital in this industry differs
conceptually from the other user costs and since real capital is "almost exogenous".
Concerning item 5) to 8), we use the net return on real capital for self-employed as an approximation
to the self-employed's capital income part of self-employed, taxable income. The net return in these
expressions is generally before paying of taxes. An exception is paying of the VAT and the investment
tax since we employ the purchaser price index of new investments exclusive of VAT and the
investment tax. We then think of the difference between the net return on real capital employing
respectively the purchaser price index inclusive and exclusive of the VAT and the investment tax as
representing the paying of these two taxes. Since the microsimulation model only deals with personal
taxes the VAT and the investment tax on inputs are not part of this model.
30
Gross production in agriculture, forestry and fishing is exogenous in the CGE model. Therefore
changes in employment and real capital may only take place through substitution effects, and not
through scale effects.
In the microsimulation model, the calculated personal income is either exogenous, as in item 2) to 4),
or computed by means of individual variables, as in item 1) (the variables starting with the letter X).
The former constitutes the largest part. For practical reasons, we assume that all the "X-variables" in
1), even though they are divided into the two categories primary industry and other industry, are
changed by the change in employees' wage income. The self-employed's endogenous calculated
personal income will then change by roughly the same percentage.
9) MSV
K3104, dividends from shares giving the right to refundment
K31041, of this: dividends from funds of shares
9) CGEV
∑{
j∈PP \ PW }
sllc j
∑ (bp
i, j
i =10, 40, 50, 30,80
− δˆi , j − risk ) pjbi k i , j
sllcj is the share of limited liability companies in production sector j.
Concerning item 9), we use the percentage change in net return on real capital for limited liability
companies as an approximation to the percentage change in dividends. As was the case for items 5) to
8), we employ the purchaser price index of new investments exclusive of VAT and the investment tax.
In addition, we assume that other taxes than the VAT and the investment tax paid by the limited
liability company constitute a constant share of the net return on real capital. We may then think of the
percentage change in the expression above as representing the percentage change in the after-tax net
return on real capital in limited liability companies. As stated earlier, the microsimulation model only
applies to personal taxes.
10) MSV
K3106, income from abroad
K3302, interest on debt to foreign creditors
31
10) CGEV
renu × ngu
renu is the nominal annual interest rate on positive financial investment in the international capital
market and ngu is net national debt.
We only have numbers for net national debt. We assume that the individual components, debt and
claims, change by the same percentage as the net variable.
11) MSV
K3101, interest on deposits in domestic banks
K3102, other interest: outstanding claims, bonds etc.
K3301, interest on debt to Norwegian creditors
We have chosen to keep these variables constant in the microsimulation model since we do not know
the percentage change in debt to Norwegian creditors and claims on Norwegian debtors.
12) MSV
K3107, dividend from abroad
This variable is kept unchanged since the corresponding CGE variable is exogenous.
13) MSV
K2805, taxable gain by selling real property
K3105, taxable gain by selling Norwegian and foreign shares
K3117, gain, gain and loss account
K3118, gain, empty/void negative balance, group A-D
K3306, deductible loss by selling real property
K3308, deductible loss by selling shares
K3317, loss, gain and loss account
K3318, loss, empty positive balance group A-D
All these variables are kept unchanged since the capital gains in the CGE model are equal to 0 in
steady state.
32
14) MSV
K3217, deficit in primary industry
K3218, deficit in other industries
K3219, deficit in partnership companies
K3220, deficit by hiring out real property
K3221, nonlocal deficit
K3309, self-employed's deficit from a previous year that is possible to carry forward
All these variables are kept unchanged since no companies in the CGE model have deficits in
equilibrium (companies with deficits have left the industry).
15) MSV
K2804, net income by hiring out real property, not in connection with self-employment
This variable is kept unchanged since all dwellings are owner-occupied and sites are not included in
the CGE model.
16) MSV
K1505, unused refund deduction from 1994
K2601, received own contributions, annuities, provisions made for a retiring farmer on handing over
the farm to his heir or successor etc.
K2602, received contributions etc. to children under 17 years of age
K2603, other contributions, annuities, provisions made for a retiring farmer on handing over the farm
to his heir or successor etc.
K2803, part owner's share of income in housing company (not percentage income)
K3103, return on the savings part of life insurance
K3108, other income
K31081, nonlocal income (not assessed on a percentage basis)
K3202, actual expenses in order to acquire income
K3207, extra expenses for board and lodging incurred when working away from home
K3208, travels to/from working place
K3209, travel expenses when visiting home
K3210, parents' deduction
K3211, trade union dues
33
K3213, seaman's deduction
K3214, special deduction associated with income from fishing
K3215, self-employed's premium to voluntary extra national insurance for sickness benefits in the
National Insurance Scheme
K3303, alimony and accommodation and support provided by the new owner of landed property for its
former owner inherent in real property with the exception of land/forest
K3304, share of deductible expenses in housing company
K3305, deductible premium for private pension scheme
K3307, other deductions
K12, loan from "Statens Lånekasse" assigned this year
K13, total paid to "Statens Lånekasse" this year
K14, of this interest paid to "Statens Lånekasse" this year
K16, interest balance in "Statens Lånekasse" at the end of the year
K45, tax-free payments
Concerning item 16), none of the variables exist in the CGE model. We have chosen to keep them all
unchanged.
B.2 Combining wealth variables in the CGE and microsimulation
models
17) MSV
K4601, taxable assets abroad
K4803, debt to foreign creditors
17) CGEV
ngu
Concerning item 17), the same comments and assumptions as for item 10) apply. In addition, we
assume that taxable assets abroad mainly consists of bank deposits and not shares.
18) MSV
K4101, bank deposits
K4104, bonds registered in "Verdipapirsentralen"
K4105, other bonds
K4106, outstanding claims
34
K4801, debt to Norwegian creditors
Since we have chosen to keep the variables in 11) unchanged, we also keep the variables in 18)
constant.
19) MSV
K4107, value for taxation purposes of shares in Norwegian companies registered in
"Verdipapirsentralen"
K41071, of this: unit in unit trust
K4108, value for taxation purposes of other shares in Norwegian companies
K4109, other securities
19) CGEV
∑
j∈PP \ {PW }
sllc j
∑
pjbi k i , j
i =10, 40, 50, 30,80
Concerning item 19), we use the percentage change in the value of real capital in limited liability
companies as an approximation to the percentage change in the mentioned share values. The value is
measured exclusive of VAT and the investment tax. This is so since we think of the market value of
shares as a sum of discounted dividends and these dividends are in item 9) measured exclusive of
VAT and the investment tax.
20) MSV
IKB, gross value for taxation purposes, own dwelling property (inclusive of flats in housing cooperatives organized for one particular project only)
IKH, gross value for taxation purposes, cottages
K4301, share of housing company's value for taxation purposes
K4302, value for taxation purposes, own dwelling
K4303, value for taxation purposes, cottage
20) CGEV
pj10,83 k10,83
where pj10,83 is the purchaser price index, inclusive of VAT, for new investments in dwellings and
cottages in the production sector Dwelling services and k10,83 is dwellings and cottages in the same
production sector. We assume that the value for taxation purposes concerning housing constitutes a
constant share of the market value of housing from baseline scenario to the different policy
35
alternatives. IKB and IKH are used as basis for calculation of capital income stemming from housing.
This capital income is not part of the pre-tax income concept in the microsimulation model but is used
as basis for calculation of income taxes. K4301, K4302 and K4303 are used as basis for calculation of
wealth taxes in the microsimulation model.
21) MSV
K4204, private cars, motor cycles
21) CGEV
pc30 hc31
where pc30 is the purchaser price index for cars inclusive of VAT and hc31 is households' stock of cars
in constant prices.
22) MSV
K4401, occupational cars, machinery and fixtures
22) CGEV
∑
j∈PP \{PW }
sse j
∑ pj
i, j k i, j
i = 40 ,50
where pji,j is the purchaser price index of new investments inclusive of VAT and/or the investment tax,
capital type i, production sector j.
23) MSV
K4404, ships and fishing boats
23) CGEV
∑ sse
j
pj 30, j k 30, j
j =13,14, 78
where 78 is Coastal and inland water transport.
24) MSV
K4403, stock of goods
K46013, real property abroad (not taxable)
36
These two variables are kept unchanged since stock of goods and purchase/sale of real capital abroad
are exogenous in the CGE model. In addition, sites are not part of the model.
25) MSV
K1504, inheritance, gift
K4102, cash amount and cheques
K4103, free amount, cash amount
K4201, furniture and other movables
K4202, pleasure boats, value < 50 000 NOK
K4203, pleasure boats, value > 50 000 NOK
K4205, caravans
K4304, value for taxation purposes of other real property and forests
K4402, cattle, fur-bearing animals, reindeer
K4501, premium fund, private pension scheme
K4502, gross repurchase value life insurance
K4503, share owner's share of housing company's other wealth
K4504, other taxable wealth
K4802, share owner's share of debt in housing company
K15, debt in "Statens Lånekasse" at the end of the year
None of these variables exist in the CGE model. We have chosen to keep them unchanged.
B.3 Combining transfer variables in the CGE and
microsimulation models
26) MSV
K2201, pension from the National Insurance Scheme
K22012, additional payment concerning pension
K2202, other pension, "tjenestepensjon", annuities and private pension insurance, provisions made for
a retiring farmer on handing over the farm to his heir or successor in agriculture and forestry
K2204, "ektefelletillegg"
K2301, spouse's pension, National Insurance Scheme
K2302, spouse's other pension
K44, paid out "avtalefestet pensjon" (AFP)
37
26) CGEV
RU611 + RU612 + RU613
where RU611 is old-age pension from the Central Government Pension Fund, RU612 is other old-age
pension and RU613 is disability pension. The percentage change in RU611+RU612+RU613 is equal
to the percentage change in WWA, the average wage per man-year for wage earners.
27) MSV
K2705, sickness benefits, liberal occupation
K2706, sickness benefits, primary industry
K2707, sickness benefits, other industry
ENGANGST, once-and-for-all benefit concerning birth
27) CGEV
RU630, sickness benefits etc.
28) MSV
K2107, unemployment benefits to self-employed
28) CGEV
RU650, unemployment benefits
In the microsimulation model, sickness and unemployment benefits have their own entries concerning
self-employed. For employees, these benefits are included in their wage income. However, the
percentage change in respectively RU630 and RU650 is equal to the percentage change in YWW, the
total wage and salary payments net of social taxes.
29) MSV
child benefit
benefit to little children
breadwinner deduction
29) CGEV
RU640, child benefits
The percentage change in RU640 is equal to the percentage change in WWA.
38
30) MSV
K11, scholarship from "Statens Lånekasse" assigned this year
K21, housing benefit from "Husbanken"
K2604, children's pension to children under 17 years of age
K34, basic benefit
K35, relief benefit
30) CGEV
RU659, other transfers, Central Government
The percentage change in RU659 is equal to the percentage change in WWA.
31) MSV
K38, social security benefits
31) CGEV
RU666, other transfers, Local Government
The percentage change in RU666 is equal to the percentage change in PC, the National Account price
index for aggregate private consumption.
39
Appendix C
Interpretation of the magnitude of a change in the degree of
equality based on a Sen welfare function
We define the Sen welfare function as
(1)
S = WE,
where S is Sen welfare, W is average standard of living per person and E is a measure of equality. In
this paper, we use E = 1-G, where G is the Gini-coefficient. Sen (1974) may be conferred for an
axiomatic basis of (1) when E = 1-G. W is in this paper measured by the real consumption expenditure
per equivalent adult (taken from the microsimulation model in 1995).
We investigate a change from situation 0 to situation 1, using symbols:
∆S = S1 - S0,
(2)
∆W = W1 - W0,
∆E = E1 - E0.
Equations (1) and (2) imply ∆S = S1 - S0 = W1E1 - W0E0 = (W0 + ∆W) (E0 + ∆E) - W0E0 =
W0E0 + W0∆E + ∆WE0 + ∆W∆E - W0E0, thus
∆S = W0∆E + ∆WE0 + ∆W∆E.
(3)
Equation (3) and ∆S = 0 imply that ∆WE0 + ∆W∆E = - W0∆E, i.e. (E0 + ∆E) ∆W = - W0∆E, thus
(4)
∆W − ∆E
=
.
W0
E1
This means that if the degree of equality is increased by ∆E , the standard of living per person can be
reduced by
∆E
100 per cent and simultaneously keeping Sen welfare unchanged.
E1
40
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